Administration July 9, 2004

Report Blasts New Jersey Pension Fund Investments

September 19, 2003 (PLANSPONSOR.com) - While Hurricane Isabel may have spared New Jersey's shoreline, a new audit report has blown a gale of criticism on the state pension fund's inability to earn the returns officials are counting on to bankroll the retirement system.

Reported by

Eric Hazard

Examining the current investments in the Garden State’s pension fund, the 268-page Independent Fiduciary Services report projects a 7.48% return on its portfolio. This poses a problem for state pension officials who are counting on an 8.75% return to meet their funding projections, according to a Newark Star-Ledger report.

The difference could translate to about $840 million less in annual investment returns than the state anticipates, based on the fund’s current value. That money would have to be made up through increased taxpayer contributions, higher employee contributions or reduced benefits. Talk of extra contributions comes at a time when taxpayers already face a tab of more than $1.5 billion to be paid over the next five years to shore up the pension system that recently lost 9% of its value and has seen benefit payments from the retirement fund surge from $290 million a month one year ago to $320 million in August.

To help correct this deficit, the IFS report recommends the pension fund branch into new investment areas, such as real estate high-yield bonds. This would help move the state away from its current investment mix that includes a 65% allocation in equities.

However, at the same time the report outlines its diversification strategy it also cautions that “diversification along these lines is practical only with the use of external investment managers,” a topic that is supported by Governor Jim McGreevey’s administration but has been a lightning rod for criticism among public employees unions who represent the Division of Investment’s 60 state employees. In fact, union representatives have gone so far as to allege State Treasurer John McCormac and Investment Council Chairman Orin Kramer are seeking to bring in outside managers only as a way to coax campaign contributions from them.

However at the same time state officials promised tight restrictions to make sure the firms earning million-dollar fees from the investment work will not be allowed to make political contributions. Kramer said he favored limiting contributions from investment firms involved with the pension system to $250 per year, and only in campaigns the donor can vote in.